Magic art of turning Tk 43 into Tk 1,200

Stocks in hot money spin again

The company had been incurring losses for four consecutive years till 2007, producing aluminium panels.

Last year its share price dropped as low as Tk 43 while the face value of the share is Tk 100.

Then came in a foreign investment fund, offering to pump in a huge amount into the company with a hopeless record.

A deal was cut between the aluminium panel producer and the foreign investment fund under which the foreign firm snapped up a huge chunk of shares at a huge premium.

The market went crazy with the news. The company's shares worth Tk 43 soon started trading at a breakneck speed at astronomical prices, reaching as high as Tk 1,199 a share.

Within a month and a half, the foreign firm dumped all its shares on the bourses, and made even more astronomical profits. It repatriated $2 million from Bangladesh against its investment of $500,000. A super deal by any standard, for a month and a half.

The local company is BD Thai and the foreign firm, GEM Global Yield Fund.

That is what happened with Dhaka Stock Exchange between April and May this year, and market operators are now questioning how wise it was for the Securities and Exchange Commission (SEC) to allow foreign funds to engage on such terms in the market without any lock-in, a measure by which such investment companies are barred from selling before a certain time the shares they possess.

Questions are surfacing over SEC's withdrawal of the lock-in system for the foreign fund. In the past, the lock-in system had been in place for all companies -- both foreign and local -- to avert short-term speculative trading, and flight of capital from the market.

Usually, there should be a lock-in for a minimum of one year on share sales, and SEC applied the safety measure for GEM Global as well, at the commission's first meeting.

But the lock-in was withdrawn by SEC later after lobbying from an influential group, according to sources. The group argued if the lock-in remained, the foreign company would not invest.

Contacted by The Daily Star, SEC Chairman Ziaul Haque Khondker declined to comment on the issue of GEM Global.

Now an increasing number of companies such as Beximco Pharmaceuticals, and Aftab Automobiles are interested to strike such deals with the same foreign investment firm.

Not only that, those two local companies are now seeking to hand over their shares to GEM as 'loan', just like BD Thai sought.

If the 'share loans' are approved that could lead to even more interesting dealings, market players say.

GEM could first sell the shares that it buys for high prices, and then also sell the shares it gets as 'loans'. Then it could repatriate the whole amount. Later, as the market cools down, GEM could again buy the same shares at a lower price and repay its 'share loans'.

And why give shares as loans to a foreign fund? Because, as market players say, if a foreign company deals in its shares, general investors will find it much more 'valuable' than if a local company sells. In another word, such an arrangement would help boost share prices much more easily.

The Bangladesh Bank however acted wisely when it disallowed such deals, as that would lead to market manipulation and capital flight. The central bank rightly put a condition that in such cases of curious 'loans', GEM must arrange a guarantee in foreign currency by a foreign bank, so even if GEM sells the 'loaned' shares, the money remains in the country. If such conditions are not put in place, then a floodgate will open for such deals, draining the country of its foreign currency.

Market players also point out another curious thing that nobody knows who have contributed towards building the GEM fund. In many countries, disclosures about investors in a fund is a must, to avoid terrorist financing. But not in Bangladesh.

BD THAI DEAL AND CRAZY INDEXDSE launched an investigation following an unusual price hike of BD Thai shares. The investigation found that GEM Global sold 2.72 lakh BD Thai Aluminium shares at Tk 909.51 each, totalling in more than Tk 24.73 crore.

DSE Chief Executive Officer AFM Shariful Islam, who led the investigation of BD Thai, also refused to comment yesterday.

The market witnessed a record-breaking trend in single-day turnovers over the last couple of months. Records were broken in single-day turnovers for at least four times within a month with the highest ever turnover of Tk 1,149 crore in DSE last Thursday.

The key index also went up by over 400 points since June 1 this year, according to DSE statistics.

CAYMAN CONNECTIONAccording to websites, GEM Global is an investment firm of GEM Global Emerging Markets, having offices in New York, London, Paris, Hong Kong, and Beijing.

GEM Global is incorporated in the Cayman Islands, a British overseas territory in the Caribbean. It is billed as a centre for tax evasion. It has a tax rate of zero for corporation tax, income tax, and capital gains, drawing some of the world's biggest banks and hedge funds to its shores.

The tiny Cayman Islands are the world's fifth biggest financial centre, where hundreds of billions of dollars flow through the economy.

The global economic downturn has brought the Cayman Islands and other offshore financial hubs into the spotlight.

Leaders from 20 of the world's most powerful countries, who gathered in London for a summit in April, put regulating offshore tax havens on the agenda. The Cayman Islands has been criticised for lax financial regulations.

LOCK-IN SAFETYMarket analysts suggest imposition of an immediate lock-in on all shares acquired by non-resident companies.

"I'm in favour of a lock-in system against issued warrants," Rakibur Rahman, president of DSE, told The Daily Star yesterday.

"There should be a lock-in system for three years, for the greater interest of the market, so no one may sell shares just after receiving or converting the warrants into ordinary shares," he added.

BEXIMCO'S BIDIn January this year, Beximco Pharmaceuticals, a company of Beximco Group, announced that it had entered into a subscription agreement with GEM Global to raise Tk 460 crore by issuing its shares or warrants.

SEC had put a lock-in system in the initial stage, but withdrew the system following Beximco's lobbying with the commission.

"This is not correct. SEC gave a consent order based on shareholders' approval, without any lock-in as in similar cases," Bexmico said in a statement yesterday.

"Mr Salman F Rahman did not lobby with SEC regarding this matter," the statement added.

There were also allegations against Rahman of lobbying with the Bangladesh Bank for permission to transfer shares as 'loans' to GEM Global, and for making the shares saleable at any time.

In yesterday's statement, Beximco denied that allegation too saying, "This is not correct. Loan shares may be given against bank guarantee or Escrow Fund. Mr Salman F Rahman did not lobby with Bangladesh Bank regarding this matter."

1996 SCAM RECALLEDThe episode is reminiscent of the 1996 scam when Awami League was in power.

"The incident calls to mind the 1996 incident. Unless the culprits are punished, there will be a repeat of the 1996 episode," Salahuddin Ahmed Khan, former CEO of DSE, told The Daily Star.

Khan said SEC should not approve such subscription to foreign funds without strict verification.

BD THAI VERSIONWhen contacted, BD Thai Chairman and Managing Director Zahid Maleque MP told The Daily Star that the deal was struck according to the rules and regulations, and all regulators such as SEC, the central bank, and DSE approved it.

Asked about the share sales by GEM Global, he said, "Selling of shares is a matter of GEM. We did everything within the framework of law."

"The lock-in system is not necessary for foreign investors," he said.

"I was able to turn my company around, thanks to the deal," he added.

Share on

SEC should take control steps to safeguard investment of people in the share business. We do not want to see another 1996.

: Malay Mridha

Good article. Very informative

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Comments

Security and money is the mutual part of life, life can't secured without money, money can't secured with investment. So investment security is the prime importance for investors, Stock Exchange must take solid security to save investor's investment.

RaheemWednesday, July 8, 2009 06:25 AM GMT+06:00 (317 weeks ago)

This is a brilliantly reported story. Thank you for reporting it and bringing it to light.

Very much praiseworthy article and contains implications for mass investors. We often treat capital market to make some quick money. But market will not yield you super normal profit throughout a long tenure. We should always look before the fundamentals of each stock we invest. Over reaction of any information will allow the Gamblers or this kind of firms to make quick money. On the other side it can make thousands of people left with a bag with no coins. So keeping emotion under control is getting more important than any time ever!

I would draw the personal attention of the hon'ble Prime Minister in the reported repatriation of $2 million from Bangladesh through market manipulation and urge her to take stern legal steps against the persons responsible.

The morale of the report is vivid. For the local investors the essence of the report is dont be greedy and be watchful about foreign investment. Foreign investors have the knack, power and money to manipulate the law and local big market players are inviting them for this sort of manipulation. Dont expect more from law making and enforcing agencies because many of them are ready to sell themselves for money. Thanks to the authors for their insights, courage and conscious.

Sohel AhmedWednesday, July 8, 2009 11:47 AM GMT+06:00 (317 weeks ago)

The status may be heading towards the 1998 stock scandal and this time also we have the same government and the same business houses. Looks like a 1998 will happen soon in 2009. Investors be careful. Administration and department of finance please wake up and save the innocent people before it gets out of control.

Recall 1996 share scam and you will recall that the Awami League led government is a stock-market-manipulation friendly government. As a pro-manipulator regime such scams are expected only. More scams seem sto be in the making - who cares about the investment of the ordinary people of Bangladesh?

AftabWednesday, July 8, 2009 01:33 PM GMT+06:00 (317 weeks ago)

The government needs to make the financial regulation as strong as it can, if they are not familiar with modern practices they can bring in specialist consultants and lawyers from abroad to teach the local regulators and enforcers how to stop loopholes and fraud from destroying our economy. We need to implement modern banking practices before we end up with another scandal.

I do not see that BD Thai or GEM did anything wrong or fraudulent here. This is pretty common sort of deal in international arena. However, the problem is here with the local & general investors in Bangladesh. There are some investors who are in the market for quite long time and have made handsome amount of money without any analytical ability or proper market knowledge. They trade based on speculative information and raise the share price above its really worth. It is very easy to influence that group of people and makes them crazy to purchase share at any higher price. This type of incident occurs since some intelligent people want to fool with general investors. This is the government's responsibility to educate the general investors and regulate to protect interest of local investors.

RahimWednesday, July 8, 2009 01:35 PM GMT+06:00 (317 weeks ago)

I believe Beximco was involved in another financial scandal a few years ago in which they made billions. I think their case led to changes in banking law. Yet, they are still the biggest loan defaulters in the country and Mr. Rahman is an advisor to the AL. Where did all that money go? Surely it could have paid off their loans. What does this say about our country?